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The Alibaba Madness Begins

NEW YORK (TheStreet) -- Yesterday, Chinese e-commerce giant Alibaba made the announcement many investors have been waiting for: The company has filed to go public. Here we go again.

Each time another one of the hot technology, e-commerce or social-media company files its registration statements, I cringe. Each seems to be bigger than the last, and in Alibaba's case, that pattern is likely to continue.

That is not to diminish what the company has accomplished so far. Getting to this point would have been unthinkable 10 or 15 years ago. But, still, the prospect of owning a piece of the company that is said to control up to 80% of China's e-commerce may be thrilling to some investors, but not to yours truly.

Despite China's growing economy during the past several years and emergence of a consumer class in that country, it is still a communist country. The Chinese government is still in control, and as long as it is, I would be hard pressed to put capital to work in that environment, even if Alibaba were reasonably priced.

But I suspect that it won't be reasonably priced, at least in my narrow, Ben Graham-inspired perspective on valuation. There have been early estimates that the company may be worth $150-$200 billion.

According to the company's F-1 registration statement, Alibaba had revenue of $5.5 billion in 2013. Revenue is admittedly growing rapidly, given the $6.5 billion in revenue generated in the nine month period ended in December.

Let's imagine that the company can generate $10 billion in revenue this year. That would put the company's price to sales ratio at between 15 and 20, assuming it is indeed valued by the market at the aforementioned range.

There's no doubt that the company is already extremely profitable, according to financial statements provided in the F-1. Net income in the nine months ended in December was $2.8 billion. That represents an incredibly high net profit margin of more than 43.3%. In fact, it's downright staggering.

Amazon (AMZN) could only dream of margins one-quarter of that level. However, it's likely, to be a margin that will be difficult to maintain.

This IPO will likely come with as much fanfare, if not more than, the IPOs of Twitter (TWTR) and Facebook (FB). Shares will likely surge during the first day of trading, and perhaps well beyond.

Then the excitement will die down, and the company will have to deliver on the irrational expectations I believe will be priced into the stock.

Expectations, by the way, which no matter how many inroads Alibaba makes into other markets, will still largely depend on what happens in China, which is still a communist country.

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